India Microfinance

Why did the Cookie crumble ?

By Tensing Rodrigues

It is a mistake to look at SKS Microfinance imbroglio as the manifestation of all that is wrong in the contemporary microfinance space in India; though it is natural to do so, given the fact that it is with SKS that the microfinance cookie began to crumble. Many would even say : now just forget that, let us move ahead.

But I strongly believe that facing the past, prepares one to begin the future on a clean slate, unencumbered by the baggage. It is tempting to believe that it was the contrasting characters and backgrounds of Vikram Akula and Suresh Gurumani that led to the Kurukshetra. Yes, they are a study in contrast; but that is not very relevant. The two models, or call them even schools of thought, the “Grameen Bank Model” and the “Retail Banking Model”, that the two represented, might have been the cause of the divide. But that was not where the cookie crumbled.

Gurumani was brought into SKS Microfinance precisely because it was believed that his chartered accountant background and 22 years of experience in the banking and financial sector would complement Akula’s equally long experience in working in rural India coupled with his charisma and marketing skills. This marriage of two skill sets became even more imperative after private-equity investors like Sequoia Capital, Vinod Khosla and Catamaran put money in the company. This is borne out by the fact that Gurumani was paid a one-time bonus of Rs 1 crore in April 2009, within five months of joining SKS.

Many, including Akula himself, argue that post-IPO, the dynamics of the sector changed. Did they ? SKS’s move into the corporate space was planned; it did not just happen; it was part of a long term strategy of growth and diversification. So, how is it that it was suddenly realized that a valuable acquisition like Gurumani did not fit into the plans ?

A more plausible explanation would be that neither Akula nor Gurumani, nor any of those who traced the future trajectory of SKS were sure about the fundas. SKS, Swayam Krishi Sangam, was started by Akula in 1997 as a non-profit organization with $52,000 raised from 357 family members and friends. It launched operations in 1998 in Andhra Pradesh with the mission to eradicate poverty. As an NGO, development organizations like Grameen Foundation and Friends of Women’s World Banking extended support. In 2005, SKS converted into a NBFC, regulated by RBI.

Later angel investors like Vinod Khosla and SIDBI chipped in and SKS tapped debt from Indian public sector banks like State Bank of India, Corporation Bank and Bank of India, private sector banks like HDFC, ICICI and Axis, and multi-national banks like Citi, ABN Amro, and HSBC. It successfully launched a rated bond issue and commercial paper, sold a “weaker section” portfolio and listed debt instruments on the BSE; all industry firsts.

Then came the IPO. And, apparently that is where SKS tripped. What could be the reason ? I find it difficult to believe that going public per se had anything to do with it. As long as it borrowed from financial institutions and the market, and accepted equity from private investors it could somehow reconcile between its self assigned mission of “fighting poverty” and raising funds commercially, as it states on its website : “SKS is conscious of the fact that the funds required for alleviating poverty are available only with commercial funders.”

But IPO brought the conflict to the fore. It also made obvious the profits that lay hidden at the “bottom of the pyramid”; Akula, Gurumani and some other employees sold a part of their equity holdings in SKS for a fortune, just before the IPO. That is what made the contradiction between the social mission and profit difficult to reconcile. The problem was not so much that it was too stark; the real difficulty lay in absence of a template for such reconciliation.

It is this template, a meaningful conceptual framework that can underlie an economically viable vehicle for financial inclusion, which is needed for smooth transformation of India’s tremendously successful non-profit organizations in microfinance space, into equally successful commercial ventures. I have said successful, not profitable !